News Column

After RBS's surprise increase in profits, is the UK banking sector almost out of the woods?

July 28, 2014

YES James Barty Six years on from the financial crisis, and there are definite signs of a return to normality for Britain's banks. We may not be completely out of the woods, but we're making good progress. When the crisis struck, UK banks were overleveraged and undercapitalised. As the Bank of England recently noted, major UK banks have raised their equity capital by £150bn, and more than doubled the common equity capital ratio since 2008. Overall leverage has also halved. Much of this is due to the efforts of regulators and politicians to create a more robust financial system and prevent a repeat of bailouts. In addition, banks have been making big changes to their businesses. Strong pre-tax performances from Lloyds and RBS highlight the benefits of these changes. The return to profitability will enable the banks to further strengthen their positions, and provide more credit to individuals and businesses. The sector has started to turn the corner, and this is good news for the economy as well. James Barty is strategy director at the BBA.

NO Andre Spicer Keep the corks in the champagne. The job of fixing the banks is far from complete. Progress has been made: they have higher leverage ratios which make them safer, toxic assets are being cleaned off balance sheets, and some banks have exited high-risk sectors. But many challenges remain. Soon, they will be hit by a new wave of negative publicity, fines and law suits associated with alleged manipulation of the foreign exchange market. Attempts to increase leverage ratios through issuing co-co (contingent convertible) bonds have been questioned by the Bank of England. There are signs the housing bubble could deflate in the coming year, which would slow lending. And cost-cutting has made staff feel insecure and overstretched. The government continues to push for more competition in the market, which would undermine the big banks' dominance. And there is always the continued threat of new challengers coming in to upset the big banks' business model. Andre Spicer is professor of organisational behaviour at Cass Business School.

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Source: City A.M. (UK)

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